Dealers committed to expanding automated trade-matching and electronic processing in OTC markets

A group of large dealers, buyside firms and trade associations are reporting on their efforts to improve over-the-counter derivatives processing.

In a letter to the Federal Reserve Bank of New York today, the firms said they are committed to achieving derivative processing scalability through electronic matching on trade date, backlog reductions, and partnering with electronic service providers to optimize the use and development of electronic services.

Some of the following key goals outlined in the letter include: an increased commitment to incorporate a full suite of derivative asset classes into the improvement process, including key metrics and benchmarks for each; more aggressive commitments in the level of settlement targets; and, a detailed roadmap will be submitted to regulators in October that will refine the broad goals and specific timeline.

The Fed noted that market participants have agreed to several interim steps as they further refine their long-term strategy, including: increasing the timeliness and accuracy of immediate post-trade processing of credit derivatives beyond the target levels set in March; developing a robust central clearing infrastructure for OTC credit derivatives with the objective to launch index products in 2008; reducing the number of outstanding credit derivatives trades through multilateral trade terminations; incorporating an auction-based settlement mechanism into standard credit derivatives documentation by the end of 2008; processing 75% of eligible OTC equity and interest rate derivatives trades on electronic platforms by January 31, 2009; and, improving collateral management practices.

In addition, market participants outlined plans to standardize documentation and automation of commodity derivatives trades, and committed to submit regular foreign exchange operating data to regulators. Market participants are also executing an implementation plan for the buy-side community.

The International Swaps and Derivatives Association, Inc., Managed Funds Association, and the Asset Management Group of the Securities Industry and Financial Markets Association said they will actively work with their constituents and other market participants to educate the marketplace on these goals, and to support ongoing efforts to improve credit and derivative market practices.

The New York Fed said it welcomes the steps announced today. “These steps represent the most comprehensive efforts to date by major dealers and buy-side firms to improve the resiliency of the OTC derivatives market,” it noted.

“These improvements to the derivatives infrastructure are important to strengthen the resiliency of the financial system.” said Timothy Geithner, New York Fed president.